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Global Supply Chain Risk Improves in Q3, But Index Remains In High-Risk

Global risk levels continued to reduce in the third quarter of 2017, according to the latest findings from the Chartered Institute of Procurement and Supply (CIPS) Risk Index, powered by data and analysis by Dun & Bradstreet economists.

It is the third straight quarter the index has improved, and the sustained improvement is positive for global supply chains.

Here’s why:

  • Overall global growth picked up, beating expectations, thanks to a broad increase in economic activity
  • Lower risk and rating upgrades were made in heavyweight economies, which outweighed downgrades in other regions
  • Operational risks for businesses declined for a second time this year

However, the index remains in high-risk territory, and several factors could impede further economic growth.

The greatest risks to the global supply chain in the near term are:

  • Increased political turmoil and tensions across the globe, which often impede or slow the implementation of growth-friendly policies, as well as the spillover of these conditions into domestic policy and cross-border operational conditions
  • Revision of trade agreements, such as NAFTA, as well as uncertainty in the Asia-Pacific region.
  • Brexit negotiations, resulting in little movement, as well recommendations that firms prepare for a hard exit, which would disrupt EU trade
  • Lower-for-longer oil prices that impact both exporting and importing countries
  • Banking-sector stresses and global financial uncertainties, including central banks beginning/continuing their slow withdrawal of monetary stimulus
  • Rising incidence of high-impact cyber attacks
  • Ongoing levels of insecurity and tensions in the Middle East, North Africa and Sub-Saharan Africa

While we are seeing continued improvement in the CRI (CIPS Risk Index) overall, the score remains just a few points shy of its all-time high.

Supply Chain Risk Levels by Country and Region

 

Recent Supply Chain Risk Levels by Country and Region

North America

Supply chain risk in North America reduced in the third quarter, despite increased political risk and lower than expected growth.

Although the fundamentals of the US economy remain robust and Dun & Bradstreet expects growth to continue, and even accelerate, its risk rating outlook has been downgraded from stable to deteriorating. This is mostly due to the political environment, where any progress has delayed the debt-ceiling debate and divisions have been exposed within Trump’s party. Geo-political uncertainty threatens to affect global trade and longer-term policies, particularly in the Asia-Pacific region.

Inflation growth in Canada has been lackluster in Q3, with all three measures of inflation slowing in recent months, and the GDP growth rate is also expected to slow. The Bank of Canada’s hawkish reaction to strengthening growth has been to hike rates again in September, which may create hardships for smaller members of the economy and limit household contributions, while its currency strength could limit exporter contributions moving forward. As it did in Q2, Canada continues to face the prospect of renegotiating NAFTA with an administration in the US that has openly attacked the free-trade agreement in the past.

Western and Central Europe

Positively, risk levels in Western and Central Europe fell in the third quarter of 2017, with five upgrades and only one downgrade in the region.

Two of the upgraded countries - Macedonia and Albania – have the momentum from the regions overall improvement to thank, as their economies are now improving and their growth forecasted to rise. Greece and Portugal saw improvements in their macroeconomic environment and economic growth. Germany was the final country to receive an upgrade, due to its low insolvency risk, payments performance and improving macroeconomic outlook, and is now Dun & Bradstreet’s best-ranked economy (previously shared with Sweden and Norway). However, Germany’s future risk rating has been revised from “improving” to “stable,” as it’s expected the new coalition government (elected toward the end of the quarter) will struggle to reach alignment on several key issues.

As a result of controversial judicial reforms and stressed relations with the rest of the EU, Poland was the one country that received a downgrade to its risk rating.

Encouragingly, there have been positive steps made in terms of trading between the EU and overseas. The Free Trade Agreement (FTA) with Canada came into preliminary force, eliminating the majority of import taxes and duties. Progress is also being made with Japan and Indonesia, and upcoming talks are planned with Australia, New Zealand and EU-China investment.

Despite the positive picture, further risks to the integrity of supply chains are visible across the rest of the region. There has been a level of political risk in Spain because of the Catalonian referendum, while the likelihood of a hard Brexit in the UK is high, as recent talks haven’t progressed as hoped.

Eastern Europe and Central Asia

Global supply chain risks in Eastern Europe and Central Asia have reduced this quarter. 

Despite the improvement, the trend continues to reflect that, on average, supply chain risk in this area is greater than in any other region, except Sub-Saharan Africa.

The main change was driven by the downgrade of Romania’s risk rating, which is attributed to an erratic and souring political environment, whereby the government has introduced of a number of new taxes without prior stakeholder consultation. If history repeats itself, Dun & Bradstreet also expects to see Romania’s growth trajectory stop or decline soon. Russia saw issues in its banking sector, as two major institutions have failed in quick succession. However, Dun & Bradstreet has not downgraded its risk rating as authorities appear to have sufficient resources to support financial institutions.

Risk remains elevated in the area despite strong GDP growth, as we see long-term low oil prices, political turmoil in Ukraine (amongst others), and an increased incidence of cyber threats, which are evolving in both scope and scale. It’s no surprise that geopolitical tensions continue, especially for Russia, the region’s heavyweight, where there appears to be a diplomatic tit-for-tat between Washington and Moscow.

In a positive development, Dun & Bradstreet upgraded Uzbekistan’s country risk rating following the government’s decision to float the currency in September – a decision made partly to crack down on black market trading. Uzbekistan has low government debt and a relatively sound fiscal position, and it’s expected currency convertibility will encourage greater foreign investment.

Asia-Pacific

The risk outlook in the Asia-Pacific region reduced very slightly in Q3, due to the stability of the region’s major countries. 

India’s demonetization effort roiled the economy in the first quarter. Dun & Bradstreet has downgraded the country outlook from ‘improving’ to ‘stable’ this quarter, as data suggests that the recovery from this shock is being held back by other negatives for the economy, including the new Goods and Service Tax (GST). The GST, which was instituted in July, has been beset by attempts at organized non-compliance, a sequence of confusing last-minute rate changes and formidable technical challenges for small businesses. Ultimately, GST should result in operational efficiencies as India gains a truly national internal customs union. India was also hit by significant flooding, particularly in Mumbai and in Gujarat, one of the most industrialized states.

Other risk factors in the region don’t appear to have had much bearing on supply chains. For example, none of the four typhoons that hit China and Japan in Q3 had major business impacts or other lasting consequences at the country level. Even the extreme tension between North Korea and the US, and the related increase in sanctions, have so far had little practical consequences for Asian supply chains outside of North Korea’s exports to China.

Middle East & North Africa

The regional risk score worsened in the Middle East and North Africa for a second consecutive quarter.

The two areas of risk are high levels of instability and insecurity in the region (particularly in Iraq, Libya, Syria and Yemen), and the diplomatic spat between the “quartet” -- Saudi Arabia, the UAE, Bahrain and Egypt -- and Qatar, which has seen the closure of borders and suspension of flights. Washington also continues to put pressure on Iran.

This quarter, we downgraded Oman’s country risk rating on the heels of increased tensions within the Gulf Co-Operation Council (GCC). The crisis among other GCC members has raised our concerns about the GCC as a political bloc and its ability to support Oman with financial packages, should its deficits become unsustainable.

Positively, pressure has eased on the region as a whole in economic terms, as oil prices strengthened within the quarter. Dun & Bradstreet upgraded Egypt’s risk rating due to significant improvements in key macroeconomic indicators – GDP growth and deficit – though it still remains in the ‘very high risk’ category. Jordan’s outlook has been upgraded to ‘improving’ because of the opening of the border with Iraq.

Latin America

Supply chain risk reduced in Latin America this quarter as the region’s economic recovery broadly bodes well for supply chains.

Notably, Argentina’s economic recovery remains on track and we have initiated a reduction in its risk score with an “improving outlook." The country is forecasting GDP growth this year, driven by ongoing implementation of the government’s USD33bn infrastructure programme, higher household spending as consumer confidence gradually improves and disinflation lifts purchasing power, as well as anticipated improvements in regional export demand as Brazil, Argentina’s single largest trade partner, returns to positive growth (albeit projected at a weak 0.3%. Resilient price pressures in Mexico kept production costs elevated.

Added to this is Argentina’s successful return to international capital markets. In June, the government sold $2.75bn of a 100-year bond, with a yield of 7.9%. The issuance of government paper on the international market allows for restructuring of public debt and a significant reduction in debt-service ratios.

The crisis in Venezuela continues unabated with continued anti-government protests and demonstrations. Venezuela’s country risk rating has a “rapidly deteriorating” trend. Dun & Bradstreet has kept the risk score the same this quarter, because an increase would take Venezuela to our lowest rating, currently assigned only to countries that are failed states. That said, we have not ruled out a downgrade in the risk score, if deemed appropriate, and continue to monitor the country closely. Nevertheless, it is important to note that the situation in Venezuela is very fluid and one that we continue to monitor closely. Ultimately, we have not ruled out a downgrade in the risk score, if deemed appropriate.

Sub-Saharan Africa

Risk in Sub-Saharan Africa fell in the three months to September, yet underlying risks point to headwinds for supply chains in the near term before better growth is likely.

The region continues its slow, steady trajectory back to plus-3% growth for the first time in three years. A synchronous improvement in global growth adds upside to the region’s outlook, with most countries and regions performing measurably better than they were a year ago. However, as the US Federal Reserve continues to raise rates and global financial conditions tighten, regional economies are expected to suffer from periods of high capital outflow and weaker currencies. Political risk is also increased, with sporadic episodes of civil disorder and political tensions.

Specifically, Kenya – typically one of the best performers in the region – is passing through a soft patch because of election-related uncertainties—namely, the holding of the disputed August presidential election and decision by the Supreme Court to void the outcome and re-run—and impact on confidence levels. The largest regional economy, South Africa, is passing through a period of intense political in-fighting and subdued economic growth, while Nigeria is facing security struggles, leading to calls for independence from militants.

Positively, Ethiopia is among the fastest-growing economies in Africa, and international firms continue to take up positions in one of the most promising markets and production bases. The government is investing heavily in infrastructure and connectivity, and it has lifted the state of emergency imposed in 2016. However, a number of areas of risk still exist here. Renewed protests, drought conditions leading to a sense of social instability, and currency losing ground could cause disruption.

For additional risk perspectives by country and region, download the full Risk Index Q3 2017 report.

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